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Rating Action:

Moody's affirms Old Mutual's ratings (Senior Baa1); outlook revised to stable from negative

10 Aug 2010

London, 10 August 2010 -- Moody's Investors Service has today affirmed the debt ratings (Baa1 senior, and see list below) of Old Mutual plc, the A1 IFSR of Old Mutual Life Assurance Company ((South Africa) OMLACSA), and the A2 IFSRs of Skandia Insurance Company Ltd and Skandia Life Assurance Company. The outlook on all of these ratings has been revised to stable from negative. Moody's has also affirmed Old Mutual's short-term ratings of P-2.

The stabilisation of the outlook is driven by Old Mutual Group's recent announcement that it has agreed terms to sell its US Life operations; Moody's previous negative outlook was principally driven by the challenges the Group faced from these operations. Furthermore, the Group's adjusted operating performance, capitalisation, and risk management controls have been improving, and the good business and financial fundamentals of Skandia and, especially, OMLACSA continue.

On 6 August 2010, Old Mutual announced that it has agreed terms to sell its US Life operations (OM Financial Life Insurance Company IFSR Baa3 on review for possible downgrade, stand-alone IFSR Ba1) to affiliates of Harbinger Capital Partners LLC for a consideration of $350m. The sale price is subject to a purchase price adjustment related to statutory capital levels at closing, finalisation of terms for an associated reinsurance transaction, and up to $125m of the purchase price will be held in escrow for 6 months after closing as part of an asset protection agreement with Harbinger. Completion is anticipated on or after 31 December 2010 and is subject to relevant regulatory approvals. In Moody's opinion, the sale of this US Life business would remove the large credit risk associated with OM Financial's $16bn fixed income portfolio, currently a significant contributor to the Group's economic risk capital requirement, as well as policy surrender risk. Notwithstanding some loss of business and geographic diversification, the ensuing enhancement of the group's overall credit profile meaningfully outweighs risks from the group's residual asset and AXXX/XXX redundant reserve exposure (until the end of 2012) which are viewed as manageable within the context of Group earnings and capital. With regard to the group's estimated net asset value write off of GBP689m, Moody's notes that the group's total equity increased by GBP545m during the first six months of 2010.

2009 and H1 10 results for Old Mutual have shown a general improvement in adjusted operating profit, and APE sales during H1 2010 increased by 28% notwithstanding continued difficult market conditions. From a capitalisation perspective, Group equity has increased from GBP9.6bn at YE08 to GBP11.3bn at H1 10 benefiting from the erosion of unrealised losses on the US Life fixed income portfolio, and the Group's FGD regulatory capital surplus has more than doubled since the end of 2008. However, earnings are expected to remain relatively volatile for the run-off Bermudan business the GMAB/GMDB reserves of which remain meaningful at around $900m, and net client cash flow remains a challenge for the US Asset Management business.

With regard to financial flexibility, financial leverage is relatively low at around 20%, and the Group is committed to reducing debt by GBP1.5bn by the end of 2012. This should aid earnings cover which has been more meaningfully pressured recently. Hard interest cover, which excludes South African earnings, improved in 2009 and H1 10 to 1.8x and 3.3x respectively against Moody's expectations of at least 2x coverage for the current rating level. Old Mutual's overall financial flexibility, in Moody's opinion, has improved somewhat as evidenced by its GBP500m senior debt issuance in 2009 and improved holding company liquidity. However, there currently remains a significant reliance on the Group's revolving credit facility.

With regard to the affirmation of the IFSR of OMLACSA, the rating agency noted this entity's leading, although less dominant position in the South African life market and good profitability. Capital remains very strong with the SCAR ratio at YE2009 improving to 4.1x (YE08: 3.8x), and although high risk assets remain a challenge this is alleviated by the flexible liability profile. The affirmation of Skandia's ratings reflects the continuation of the improved sales performance/net client cashflows, the healthy margins within the Nordic operation and improved regulatory levels of capitalisation. These strengths are offset to some extent by the continued margin pressure within the UK. OMLACSA and Skandia should also benefit from the continuing embedding of the Group's revised risk management processes.

Moody's said that the stable outlook is predicated, inter alia, on Old Mutual successfully completing the sale of its US Life operations; maintaining good business and geographic diversification; sustained hard interest cover of at least 2x; and continued good credit fundamentals for its South African and European (Skandia) operations.

The following ratings were affirmed with a stable outlook:

Old Mutual plc senior Baa1

Old Mutal plc EMTN program senior Baa1

Old Mutual plc long term issuer Baa1

Old Mutual plc EMTN program subordinated Baa2

Old Mutual plc subordinated Baa3

Old Mutual plc junior subordinated Baa3

Old Mutual plc preferred Baa3

Old Mutual Capital Funding LP preferred Baa3

Old Mutual Life Assurance Company (South Africa) IFSR A1

Skandia Insurance Company Ltd IFSR A2

Skandia Life Assurance Company Ltd IFSR A2

The following ratings were affirmed:

Old Mutual plc commercial paper P-2

Old Mutual plc EMTN program short-term P-2

Old Mutual is a UK domiciled financial services group with total assets of around GBP164 billion at 31 December 2009.

The date of the previous rating action was 5 March 2009 when Old Mutual's long-term debt ratings were downgraded, and all Old Mutual long-term ratings were assigned a negative outlook.

The principal methodology used in rating Old Mutual was "Moody's Global Rating Methodology for Life Insurers", published in May 2010, which can be found on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory on Moody's website.

London
Simon Harris
MD - Financial Institutions
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Dominic Simpson
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom

Moody's affirms Old Mutual's ratings (Senior Baa1); outlook revised to stable from negative
No Related Data.
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